Why are manipulated stocks so risky?

Questions: Why are manipulated stocks so risky?

https://myinvestingnotes.blogspot.com/search?q=manipulators

14.1.2010

Here are the main points why manipulated stocks are so risky.

List of Main Points

1. Market Structure Facilitates Manipulation: Bursa Malaysia has an abnormally high number of listed companies for its small market size and economy, creating a pool of low-value, illiquid stocks that are easy targets.

2. Shifted Motivation for Manipulation: After the 1997-98 crisis, banks became wary of accepting inflated stocks as loan collateral. The primary goal of manipulation is now to directly profit from pumping and dumping shares on retail investors.

3. The Manipulation Playbook ("Pump and Dump"):

   • Accumulation & Cornering: Manipulators buy up large stakes at very low prices.

   • Artificial Inflation: They use tactics like wash trading (fake accounts), ambitious announcements, and large fake buy orders to create false volume and demand, driving the price up.

   • Enticing Punters: The rising price and fabricated activity lure in speculative retail investors ("punters").

   • The Dump: While maintaining the illusion of demand, manipulators secretly sell their holdings at inflated prices. Eventually, they dump all remaining shares, causing a crash.

4. Extreme Risk for Investors:

   • Predictability: It's nearly impossible for outsiders to know when the dump will happen.

   • Crash, Not Correction: The decline is typically sudden and severe ("crashes").

   • Asymmetrical Outcome: Investors risk losing everything ("lose a bomb") on a single failed exit, while gains from timely exits are speculative and risky.

5. Fundamental Worthlessness of Targets: In Malaysia, many manipulated stocks are from fundamentally weak companies on the "brink of bankruptcy" with little chance of a real turnaround, making them pure gambling vehicles.

6. Author's Advice & Disclaimer:

   • Strong Warning: Trading such stocks is compared unfavorably to casino gambling.

   • Alternative Suggestion: For those drawn to speculation, exploring speculative stocks on the ASX (Australian Securities Exchange) is presented as a potentially better option, as many are exploration companies with genuine, if slim, prospects.

   • Recommended Approach: The only safe way in Malaysia is fundamental, long-term investing.

   • Legal Disclaimer: The author states they are not a licensed adviser and shifts responsibility to the reader and their licensed remisier (broker).

Discussion

The text provides a coherent and critical analysis of stock manipulation in the Malaysian context. It effectively traces the evolution from collateral-based fraud in the 1990s to the modern retail-focused "pump and dump" scheme. The core argument is that the risk is systemic and exacerbated by local market conditions.

The discussion highlights the asymmetry of information and control. Manipulators control the supply, information flow (via announcements), and even the appearance of demand. Retail investors are at a severe disadvantage, participating in a rigged game where the exit doors are controlled by the manipulators.

The comparison to a casino is apt but with a crucial distinction: in a casino, the odds are mathematically known and regulated. In a manipulated stock, the "house" (the manipulator) not only controls the odds but can also change the rules of the game mid-play.

The author's perspective is notably cynical about the quality of speculative Malaysian companies and suggests a geographical arbitrage—speculating in Australian resource explorers is framed as having more merit due to the nature of their business (seeking a genuine discovery) compared to the "worthless" Malaysian counterparts.

Summary

Manipulated stocks are exceptionally risky because they represent a controlled deception rather than a genuine investment. In markets like Malaysia, where many small, low-quality companies are listed, manipulators can easily corner a stock. They artificially inflate its price through fake volume and misleading news, creating a false narrative of success to lure speculative retail investors. Once enough outsiders buy in, the manipulators dump their shares, collapsing the price. The retail investor faces a near-impossible task of timing their exit before this crash, often leading to catastrophic losses. The entire process is characterized by a fundamental disconnect between the stock's price and its underlying value, making it a form of financial gambling where the odds are deliberately and opaquely stacked against the public participant. The only advised antidote is to avoid such schemes entirely and stick to fundamental investing.

Stock Market Scams

 

Stock Market Scams

https://myinvestingnotes.blogspot.com/2012/03/stock-market-scams.html

28 March 2012

1. The Pump and Dump

The pump and dump is one of the oldest and most effective scams. Usually, pump and dumps are used on small stocks selling below $1.00 a share because it is easier for pump-and-dumpers to manipulate the stock price with smaller stocks.

2. Insider Trading
There are actually two types of insider trading: legal and illegal.

Summary

This article outlines two common types of stock market scams that exploit unsuspecting investors:

1. Pump and Dump
   A fraudulent scheme in which insiders artificially inflate ("pump") the price of a low-value stock—often penny stocks—by spreading false or overly optimistic information through channels like Internet chat rooms or press releases. As outside investors buy in and the price rises, the scammers sell ("dump") their shares at a profit. Once the hype fades and the truth emerges, the stock price collapses, leaving ordinary investors with nearly worthless shares.

2. Insider Trading
   There are two types:

   • Legal insider trading: When company insiders (employees, executives) trade their company's stock but properly report it to the SEC.

   • Illegal insider trading: When insiders trade based on material non-public information—or when they tip off others who then trade. The article suggests illegal insider trading is widespread, even though the SEC occasionally prosecutes high-profile cases to deter it. The author estimates that many insiders routinely profit from undisclosed company information.

Discussion Points

• Accessibility of Scams: The Internet has made "pump and dump" schemes easier to execute by allowing fraudsters to reach large audiences quickly.

• Vulnerability of Investors: Both scams prey on investors' trust and desire for quick gains—especially in the case of penny stocks, which are easier to manipulate.

• Regulatory Challenges: While illegal, these practices persist. Insider trading, in particular, is described as an "open secret," implying enforcement is inconsistent and many violations go undetected.

• Investor Responsibility: The article implicitly warns investors to be skeptical of "too good to be true" opportunities and to research before investing, especially in low-priced stocks or tips from unverified sources.

Comment

The article serves as a clear, practical warning for investors, emphasizing that scams are not only prevalent but have evolved with technology. While it rightly highlights the persistence of illegal insider trading, it could further discuss how ordinary investors can protect themselves—such as by verifying information through official SEC filings and avoiding investments based solely on rumors or anonymous online hype. Ultimately, it reinforces the need for both investor education and stronger regulatory oversight to maintain market integrity.

Hidden hands behind penny stock surge

Hidden hands behind penny stock surge (The Edge) 2020

https://myinvestingnotes.blogspot.com/2020/10/hidden-hands-behind-penny-stock-surge.html

Based on a 2020 special report by The Edge Malaysia, a group of individuals, suspected of acting together, were linked to over 20 publicly traded companies on Bursa Malaysia. These companies, often penny stocks with poor fundamentals, experienced unexplained, volatile price surges.

The "Irrational Exuberance" of Selected Stocks

The report highlighted extraordinary, unexplained gains in several loss-making companies over a short period in 2020, which were disconnected from their financial performance:

• Saudee Group Bhd: Gained over 300% despite significant net losses.

• Anzo Holdings Bhd: Surged over 1,000% in about two months.

• PDZ Holdings Bhd: A financially troubled shipping company gained over 500%.

• XOX Bhd: Gained over 430% in six weeks.

Subsequent Developments and Reactions

The situation continued to evolve after the original report:

• Official Scrutiny: In 2023, authorities, including the Inland Revenue Board and Malaysian Anti-Corruption Commission, raided offices in Menara Lien Hoe to investigate allegations of stock price manipulation and money laundering. The Securities Commission Malaysia (SC) was also said to have the group "on its radar".

• Legal Action Against the Media: In 2022, editors from The Edge were charged with criminal defamation by businessman Datuk Kua over the articles. The Edge stated the articles were based on public data and argued the charges were an inappropriate use of public resources for a civil matter.

• Market Activity: The volatile trading of the identified penny stocks subsided after the 2021 article and regulatory warnings, but not before many investors suffered losses.

Understanding Penny Stock Manipulation

The alleged activities align with classic market manipulation schemes:

• Pump-and-Dump: Fraudsters artificially inflate ("pump") a stock's price through coordinated buying and misinformation, then sell ("dump") their holdings at the peak, leaving other investors with worthless shares.

• Asset Shuffling & Cash Calls: The group was accused of passing assets between linked companies and repeatedly raising capital through share placements, potentially to move funds or enrich certain parties.

Bursa Malaysia striked off Securities dealer (12.8.2014). How easy was it to manipulate so many counters at one go?

 

Bursa Malaysia reprimands, strikes off TA Securities dealer

https://myinvestingnotes.blogspot.com/search?q=manipulator

http://www.thesundaily.my/news/1137953

12 August 2014 

=====

How easy was it to manipulate so many counters at one go?

That's a question that cuts to the heart of the vulnerability exposed in this case. Based on the details, it appears it was surprisingly easy for Oh  to manipulate multiple counters simultaneously, due to a "perfect storm" of factors that existed at the time.

Here’s why it was likely easier than one might think:

1. Nature of the Counters: Small, Illiquid Stocks

The six counters (Biosis, Metronic, Ariantec, Luster, Harvest Court, Naim Indah) were almost certainly small-cap or micro-cap stocks with low liquidity (thin trading volume).

• Why this matters: In an illiquid stock, a relatively small amount of money can move the price significantly. Placing a few large orders can set the price, and creating even a modest volume of artificial trades can make it look "active." Manipulating a highly liquid blue-chip stock like Maybank would require billions and would be nearly impossible for one dealer.

2. The Mechanism: Married Trades and Cross-Trades

Oh’s primary tools—Married DBTs and matched cross-trades—are executed within the same brokerage (TA Securities).

• Internal Matching: He was essentially moving shares between his own pool of client accounts. This doesn't require finding an independent, outside buyer or seller on the open market. The trade is pre-arranged and then executed on the exchange, creating a legitimate-looking record but with no genuine transfer of risk or ownership intent.

• Control Over Both Sides: By having authority or influence over the accounts involved (including family members), he controlled both the buy and sell orders. This made execution straightforward and predictable.

3. Lack of Effective Real-Time Surveillance (Circa 2014)

While Bursa Malaysia had surveillance systems, the sophistication in 2014 might not have been as advanced as today in detecting complex, multi-account relationship patterns in real-time.

• Detection was likely post-trade: The manipulation occurred "over a period of several months," suggesting it was detected by analyzing historical patterns and linking accounts afterward, not stopped immediately.

4. Exploiting the Commissioned Dealer Role

As a commissioned dealer, his income depended on generating trading volume. This provided both motive and a veil.

• Volume as Cover: High volume, even if artificial, could be rationalized as being "for the clients" and generating commissions for the firm. It didn't necessarily raise immediate red flags internally if it was profitable for the branch.

• Client Trust/Family Links: Using accounts of family members and compliant clients removed a major obstacle—client suspicion. The clients in on the scheme were beneficiaries; others may have trusted him blindly.

5. The "One-to-Many" Model

Oh didn’t need to manipulate each stock in isolation with a separate scheme. The case describes a hub-and-spoke model:

• Oh was the hub. He used the same pool of interconnected client accounts to execute similar manipulative patterns across different counters. The technique (married DBTs, cross-trades) was identical; only the stock ticker changed. Once the method was established, applying it to a sixth stock was just incremental work.

6. Potential Lack of Rigorous Internal Controls

The fact that this went on for months raises questions about TA Securities' internal compliance and supervisory oversight at the time.

• Dealer Discretion: He may have had excessive discretion to execute complex off-market (DBT) transactions without immediate supervisory approval.

• Focus on Revenue vs. Risk: A high-commission producer might have been subject to less scrutiny.

Conclusion: It Was Relatively Easy Within That Specific Ecosystem

It was not easy in the sense of being simple or risk-free, but it was highly feasible given the confluence of:

• The Target: Illiquid, low-priced stocks.

• The Method: Internal trades he fully controlled.

• The Position: Direct access to the trading system as a dealer.

• The Motive: Commission and client favor.

• The Weakness: Likely lagging surveillance on relationship-based trading and inadequate internal controls.

In today's environment, such a scheme would be significantly harder to sustain for months due to:

• Advanced AI-driven surveillance that maps relationships and detects manipulative patterns in real-time.

• Tighter regulations on DBTs and conflicts of interest.

• Stronger internal compliance mandates at brokerages.

The case serves as a historical lesson on why regulatory technology (RegTech) and a strong compliance culture are essential to close these systemic loopholes.

Bursa fines and suspends dealer for manipulative trading.

 

The manipulative trading activities described in this case represent a direct breach of market integrity and cause several forms of harm to average investors in Hap Seng Consolidated Bhd (or any affected stock), even if they are not directly targeted. Here’s a breakdown of the harm caused:

---

1. Artificial Price Inflation

Hazni’s repeated entry of buy orders above prevailing market prices—especially during the final trading hour and pre-closing phase—artificially inflated Hap Seng’s share price.

• Impact on Retail Investors: Average investors relying on market prices for buying/selling decisions may have purchased shares at an artificially high price, believing the price reflected genuine supply and demand. When the manipulation stops or is uncovered, the price often corrects downward, causing immediate paper or real losses for those holding the stock.

---

2. Misleading Market Signals

By narrowing spreads and inflating the buy side of the order book, Hazni created a false impression of strong buying interest and price strength.

• Impact: Retail investors and traders using technical analysis or order book data could have been misled into thinking there was genuine bullish sentiment, prompting them to buy or hold positions based on distorted information.

---

3. Manipulation of Closing Price

Placing buy orders above the last traded price during the pre-closing phase to influence the Theoretical Closing Price (TCP) is particularly harmful.

• Impact: The closing price is a key reference point for end-of-day valuations, derivatives pricing, and benchmark calculations. An artificially high close can affect decisions related to margin calls, fund NAV calculations, and trigger automated trading systems, harming investors who rely on accurate closing prices.

---

4. Erosion of Trust in Market Fairness

When registered dealers engage in or facilitate manipulation, it undermines confidence in the fairness and transparency of the market.

• Impact: Average investors may become hesitant to participate in the market, fearing that prices do not reflect true value. This reduces market liquidity and efficiency, ultimately harming all participants.

---

5. Unfair Advantage to the Manipulating Client

The corporate client on whose behalf Hazni executed trades gained an unfair advantage—likely to exit positions at inflated prices or to meet certain portfolio valuation targets.

• Impact: Other investors, especially retail traders, are effectively disadvantaged because they are trading in a rigged market environment without access to the same manipulative tactics.

---

6. Regulatory and Reputational Risk to the Market

Such incidents can lead to broader regulatory scrutiny, tighter trading restrictions, or loss of foreign and institutional investor confidence in Bursa Malaysia.

• Impact: A tainted market reputation can lead to reduced capital inflow, lower liquidity, and higher cost of capital for all listed companies, indirectly affecting shareholder value.

---

7. Hazni’s Failure as a Professional Gatekeeper

Bursa’s statement emphasizes that Hazni failed to exercise due diligence and acted as a “mere order-taker.”

• Impact: This negligence allowed manipulative activities to persist even after surveillance warnings. If dealers do not act as frontline safeguards, market integrity relies solely on retrospective enforcement, leaving investors exposed to ongoing manipulation.

---

Conclusion:

While the direct financial penalty and suspension are imposed on Hazni, the real victims are the average investors who traded under false pretenses. Their losses may never be recovered, and their trust in the market may be permanently damaged. This case highlights the critical role of licensed professionals in maintaining market integrity and the need for continuous surveillance, stringent enforcement, and investor education to protect the investing public.

The case reveals a dynamic where both the dealer and his client benefited, but in different ways, and the client (the "master") was the primary beneficiary and likely the instigator.

Let's break down the "why" and "who."

1. Why Did the Dealer Behave This Way?

The dealer's actions can be attributed to a combination of pressure, misaligned incentives, and rationalization:

• Client Pressure & Fear of Losing Business: The dealer, was acting for a corporate client. Large clients generate significant commission revenue for both the dealer and his firm. There is immense pressure to retain such clients and keep them happy. Pushing back on their orders, even suspicious ones, risks the client taking their business elsewhere.

• The "Order-Taker" Mentality: Bursa's reprimand crucially states it was "unacceptable for a dealer to act as a mere order-taker." This is the core of the issue. Instead of exercising professional skepticism and duty to the market, he chose to follow instructions blindly, prioritizing client service over market integrity. He likely rationalized it as "just doing my job for the client."

• Possible Direct or Indirect Incentives: While not stated, it's plausible that:

  • The dealer earned commissions on the high volume of trades executed.

  • His performance or bonuses might have been linked to client satisfaction or trading volume from key accounts.

  • There might have been an implicit promise of future business or rewards from the pleased client.

2. Who Benefitted?

A. The Corporate Client (The "Master") – PRIMARY BENEFICIARY
The client, whose account was used, received the most direct and substantial financial benefit. The manipulative trading aimed to:

• Artificially Inflate the Share Price: This could help the client in several ways:

  1. Improve Portfolio Valuation: If the client held a large position in Hap Seng, a higher closing price would make their portfolio/balance sheet look stronger at reporting periods (e.g., quarter-end or year-end).

  2. Facilitate an Exit: They could sell their own shares into the artificially created strength at a higher price.

  3. Support a Related Transaction: The price could be propped up to aid a secondary offering, a collateralized loan based on share value, or to meet certain covenant requirements.

  4. Influence Derivative Positions: If the client had options or other derivatives tied to Hap Seng's closing price, manipulating the TCP could lead to direct profits on those contracts.

• Benefit: Direct financial gain, improved financial metrics, or successful execution of a related financial strategy.

B. The Dealer – SECONDARY BENEFICIARY
His benefits were more indirect and career-oriented, but real:

• Retaining a Lucrative Client: By being compliant, he secured ongoing business and commissions from a major client.

• Avoiding Conflict: He avoided a difficult confrontation with a powerful client.

• Career & Commissions: Meeting the client's demands likely translated to steady income and possibly positive performance reviews in the short term, before the manipulation was discovered.

3. How Did They Benefit Specifically?

• Client's Gain: Financial profit and strategic advantage. They used the dealer as a tool to manipulate the market for their own ends, turning market mechanics (order book, closing price) into a lever for private gain.

• Dealer's Gain: Job security, steady commissions, and short-term professional ease. He traded his regulatory duty for client appeasement, opting for the path of least resistance in his daily work.

The Critical Imbalance

The key point is the asymmetry of risk and reward:

• The Client reaped most of the financial rewards while the dealer bore the execution risk.

• The Dealer took on immense legal, regulatory, and career risk (fines, suspension, reputational ruin) for what were, in comparison, modest professional benefits (keeping a client happy).

Conclusion: This was not a case of a rogue dealer acting alone for personal speculative gain. It was a case of a dealer failing in his duty as a market gatekeeper, succumbing to client pressure, and becoming an essential tool for a client's market manipulation scheme. The client was the architect and primary beneficiary; the dealer was the compromised facilitator who benefited indirectly but paid a heavy personal price when caught. Bursa's sanctions on the dealer send a clear message that professionals cannot hide behind client instructions and must actively prevent market abuse.